Analysis: A "Thaksinomics" renaissance in Thailand

Supporters of Yingluck Shinawatra, the sister of former Thai Prime Minister Thaksin Shinawatra, raise her image as she took stage during a campaign rally in Si Saket north east Thailand on June 29, 2011. Thailand will hold a general election on July 3.
REUTERS/Adrees Latif

These could deliver a burst of consumer spending and investment but also fuel a host of problems -- from higher debt to delays in economic reforms and an inflationary rise in the cost of business in Southeast Asia's second-largest economy.

With inflation already accelerating, and the economy slowing, some economists question whether Thailand is ready for a new round of "Thaksinomics," as the signature expansionary policies of ousted prime minister Thaksin Shinawatra are known.

But that looks inevitable, regardless of who wins.

"Everyone seems to compete over how much more they can hand out than the other party without looking at the bigger picture -- the long-term sustainable growth," Bank of Thailand Assistant Governor Paiboon Kittisrikangwan told Reuters in an interview.

Policies of the two main parties are strikingly similar, promoting big-ticket spending on infrastructure projects - from high-speed trains to subway extensions - and various giveaways aimed at boosting spending power, especially in rural areas.

That approach helped Thaksin, a telecoms magnate, score landslide election wins in 2001 and 2005 before his ouster in a 2006 coup. His programs -- from low-cost health care to cheap credit -- were so popular the current government adopted them.

The rival Democrat Party of Prime Minister Abhisit Vejjajiva promises similar short-term populist measures and could end up ruling again if Puea Thai wins the most votes but fails to form a coalition, as some predict.

"If you look closely at the two parties' policies, there is not that much difference," said Usara Wilaipich, an economist at Standard Chartered Bank in Bangkok.

Under Thaksin, money funneled into villages through a debt moratorium for farmers and cheap loans had a knock-on effect on the whole economy, fuelling a boom in household spending.

Gross domestic product (GDP) grew on average by 5.7 percent a year between 2002 and 2006, despite the headwinds of high oil prices, the Iraq war and an outbreak of the SARS virus. That compared with growth of 2.2 percent in 2001 and the economic turmoil of the late 1990s.

But critics said Thaksinomics was little more than pork-barrel politics and failed to substantially boost jobs or end a dependency on exports, which were equivalent to about 50 percent of total GDP in 2005, a ratio that is now about 65 percent.

The cheap credit also drove household debt as a percentage of income above 57 percent from below 50 percent in 2001.

The largesse this time around could cause other problems, depending on how it is funded or whether it gets watered down.

Thailand's debt-to-GDP ratio already was expected to rise from a current 42 percent to above 60 percent -- generally regarded as the safe limit for developed economies -- within six years, according to the central bank. Sudden expansionary policies could accelerate that trend.

Developing or emerging economies are generally urged to keep debt-to-GDP ratio at around 40 percent.

Thailand's problems are compounded by weak tax revenues. Its proportion of tax revenue to GDP is just 17 percent. Compare that with 27 percent in Japan or about 40 percent in Britain.

"This is a real economic risk going forward," Nuchjarin Panarode, an economist at Capital Nomura in Bangkok, said of the impact on Thailand's finances. "They may only implement some of the populist policies, otherwise it would mean major funding."

Paiboon at the central bank said that while the size of the budget over the past four years had swollen by 8.8 percent a year, revenue had grown by less than half that rate, at 4.2 percent. And 80 percent of Thailand's budget goes into current expenditure, with less than 17 percent pumped into investments.

He said the next government needed to consider major tax reforms, such as raising its 7 percent value-added tax and closing tax loopholes.

"WAGE-PRICE SPIRAL"

Another worry is inflation, which reached 4.2 percent in May, its highest in 32 months, and could accelerate to nearly 15 percent if the opposition prevails with promises to lift the minimum wage to 300 baht ($15) a day, said Tisco Securities.

That is 40 percent above the current average minimum wage. While campaigning on Wednesday, Yingluck suggested the minimum wage would keep rising under her administration, reaching 1,000 baht a day within nine years.

The Democrats promise to lift the minimum wage by 25 percent over two years. Both parties face pressure to reverse a trend in which Thailand's minimum wage has trailed inflation for the past decade -- an issue that has fueled working-class frustrations that led to violent protests last year.

"The key risk is that inflation will be extremely higher," Tisco said.

Higher wages could threaten Thailand's cost advantage. An average Thai factory worker earned $263 a month according to a 2010 survey by the Japan External Trade Organization, less than India's $269, Malaysia's $298 or China's $303.

Economists at Credit Suisse said Thailand could see a "mini wage-price spiral" that would keep pressure on the Bank of Thailand to be "more hawkish than initially expected this year," following seven increases in the benchmark policy rate by a total 175 basis points since last July.

Chutima Woramontri, an economist at BNP Paribas, said the key policies of Yingluck's party would cost about 264 billion baht ($8.5 billion) - including cutting corporate tax from 30 to 23 percent next year and to 20 percent the year after.

Puea Thai has also promised to introduce credit cards for farmers, raise the wage for new graduates in state enterprises by 41 percent and provide a two-million-baht payout to each of Thailand's 73,000 villages.

About 800,000 children entering the school system would also receive a free tablet PC under policies intended to cement the party's appeal among the urban and rural poor.

That's a crucial demographic in a country in which the richest 20 percent of the population earns about 55 percent of the income while the poorest fifth gets 4 percent, among Asia's widest income disparities, according to the World Bank.

The Democrats have promised to build a high-speed rail network, extend subsidies on diesel, provide free electricity for low-income households and raise farm incomes by 25 percent through subsidies among other policies.

Chutima at BNP said the key Democrat promises would cost about 235 billion baht ($7.6 billion).

The central bank is urging whoever wins the election to keep the current government's pledge to balance the budget by 2015.

Pimonwan Mahujchariyawong, an economist at Kasikorn Research Center, said a combination of reducing public holdings in state enterprises, private sector investments and state funds could help the next government meet its promises.

"There is room to draw private participants into government investment projects, especially profit-making projects. That could help the government proceed with key public projects," she said.

(Additional reporting by Orathai Sriring; Editing by Nick Macfie and Robert Birsel)

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